Technology sourcing and the strategic roles of
manufacturing subsidiaries in the U.K.: local competences and global
competitiveness.

Abstract:

As global competitiveness intensifies MNEs need to get new products
into all major markets quickly and in ways that respond distinctively to
the needs of these markets. In allowing subsidiaries to implement this
responsiveness an additional advantage is that these enhanced roles
permit them to extend their use of local technological expertise and
widen the knowledge scope of the group.

* A widening of their sources of technology inputs underwrites
creative roles in subsidiaries, but this usually remains within the
established technological trajectory of the group.

Introduction

The new competitive conditions of the global economy demand that MNEs
adopt a genuinely decentralised perspective on not only the use of their
technological and managerial competences (the way they are applied), but
also on the way they are generated. This development involves a thorough
redefinition of the roles of overseas subsidiaries in the process of
modernising the competitive organisation of the MNE.

Whilst the demand situation facing subsidiaries has become more
intense and distinctive, their supply situation has also developed
increasingly original conditions which allow them the opportunity to
acquire competences within their MNE group. Rising incomes, in many host
countries have allowed for the rise of more discriminating, and less
submissive, consumer tastes, manifested through an increasing demand for
national or regional products. The strengthening of indigenous industry
in many host countries, alongside the emergence of new MNEs (from Japan
and similar countries) made the industrial environment vastly more
competitive. This increased diversification of tastes and emergence of
new forces of competition was reinforced by the generation of managerial
and other skills, and in particular of technological capacities and
specialised competences, in an increasing range of countries, which
therefore became available to MNEs' subsidiaries in these
countries. Thus creative subsidiaries are increasingly allocated
extensive responsibilities to develop their own original capacities in
order to supply effectively their own, n original and distinctive
markets (which are now likely to extend beyond their host country).(1)

Central to the emergence of such creative subsidiaries is the
development of their own technological capabilities within the portfolio
of technologies available to the group, in achieving this the subsidiary
will build up a certain degree of technological capacity within its own
operations (i. e. a R & D laboratory or an engineering unit) but may
also establish collaborative arrangements with other elements in the
host-country science and technology base. In this way the technological
profile of a creative subsidiary will reflect the distinctive
specialised technological capacities of the country in which it is
located. This, in turn, represents a realistic view of the need for a
MNE to take advantage of all the technological opportunities available
to it throughout its global operations, in order to generate and retain
competitive advantages.

These perspectives on contemporary MNE operations are investigated
in this paper through an analysis of replies to a questionnaire survey
sent to manufacturing subsidiaries of foreign companies operating in the
U.K.(2) In total the questionnaire was sent to 812 such subsidiaries
with satisfactory replies being received from 190 of them.(3) In the
next section evidence is provided on the relative prevalence of four
different types of subsidiary role. The third section evaluates the
importance in these subsidiaries' operations of seven different
sources of technology, and relates their relative position to the roles
played by the subsidiaries.

Roles of Subsidiaries

Respondents to the questionnaire were asked to evaluate the
importance of four possible roles in their operations as being either
`our only role', `our predominant role', `a secondary
role', or `not a part of our role'. Overall 39 indicated that
they focused on a unique role, whilst 216 evaluations of particular
roles as being predominant ones were provided. The latter number
reflects the reluctance of some respondents to separate two roles in
terms of the lead (predominant) position in the subsidiary's
overall operations. The subsidiaries of European MNEs emerged us rather
more inclined to possess distinct lead roles, and/or to be able to
delineate clearly the hierarchy of roles in their operations. Thus
whilst the proportion of European subsidiaries that discerned a
particular role as being their only one was very close to the average
for all respondents, an above average proportion reported certain roles
as absent from their operations and a below average proportion
considered roles to be their predominant one.(4)

The first role investigated was defined as `to produce for the
U.K. market products that are already established in our MNE
group's product range'. This type of import-substituting role
(supplying to the host-country market goods that are already established
elsewhere in the MNE's operations, so that they could otherwise
have been supplied through trade) is traditionally perceived as one that
emerged in eras that were characterised by high levels of protectionism,
which artificially fragmented markets. With the lowering of
protectionism through GATT rounds and the emergency of free-trade areas,
and the general intensification of international competition, this role
is often considered to be in decline,(5) to be replaced by subsidiaries
that are more oriented to specialised positions in the supply of the
wider markets that are now accessible. Within the context of the more
contemporary approaches to global competition, however,
local-market-focused subsidiaries could still persist where a strong
motivation to adapt established products to meet distinctive
local-market needs and characteristics exists.

Of the 185 subsidiaries that evaluated their operations in terms
of this first role 15 (8.1%) considered it to be their only one, 69
(37.3%) rated it a predominant role, 50 (27.0%) felt it only took a
secondary position and 51 (27.6%) did not include it. Once these replies
are summarised in terms of average responses (ARs) Table 1 shows that
this is still, very marginally, the most pervasive of the four roles. It
is also marginally the relatively most prevalent role amongst European
MNEs' subsidiaries in the U.K.(6) and takes the equal leading role
for the U.S. Food is the industry in which this role is most prevalent
in subsidiaries in the U.K. It is least prominent in two industries,
mechanical engineering and metal manufacture and products, where the
frequent need to customise items for individual consumers mitigates
against routine supply of established standardised for even slightly
adapted) products.

Table 1. Relative Importance of Roles Played by MNE Subsidiaries in
the U.K., by Industry Home Country

Role of subsidiaries

A -- to produce for the U.K. market products that are already
established in our MNE group's product range.

B -- to play a role in the MNE group's European supply network
by specialising in the production and export of part of the established
product range.

C -- to play a role in the MNE groups's European supply network
by producing and exporting component parts for assembly elsewhere.

D -- to develop, produce and market for the U.K. and/or European (or
wider) markets, new products additional to the MNE group's existing
range.

(*) Respondents were asked to evaluate each role as (i) our only
role, (ii) our predominant role (ii), a secondary role, (iv) not a part
of our role.

(**) The average response is calculated by allocating a value of 4 to
`our only role', 3 to `our predominant role', 2 to `a
secondary role' and 1 to `not a part of our role'.

(***) Includes subsidiaries of MNEs from Australia and Canada.

The second type of subsidiary position investigated was `to play a
role in the MNE group's European supply network by specialising in
the production and export of part of the established product
range'. This can be perceived as a contemporary evolution of the
first role in terms of one of its two key characteristics, i.e. its
target market. Thus this second type of role reflects the ease of trade
within the EU, in particular, so that MNEs can allow individual
subsidiaries to focus on the cost-effective production of a limited part
of the relevant product range and supply this to markets throughout the
region. In terms of the other defining characteristic, however, there is
no substantive evolution, in that the subsidiary still produces goods
that are already in position as part of its MNE's established
product range. Thus the new role may enhance the effectiveness of the
subsidiary's contribution to group operations by increasing the
efficiency of its use of standard production inputs (by focusing on a
narrower range of products and achieving economies of scale that were
not available when it was limited essentially to its host-country
market), but it still does not provide scope for the use of the creative
managerial, technological and other talents that might be accessible to
it.

Again 185 subsidiaries evaluated their operations in terms of this
role, with 6 (3.2%) rating it their only one, 86 (46.5%) their
predominant one, 40 (21.6%) a secondary one and 53 (28.6%) believing it
to be absent. As Table 1 shows, when these results were converted into
an average response this role virtually matched the first as the most
prevalent in the current operations of MNE subsidiaries in the U.K. This
type of role appears to have emerged most decisively in the operations
of Japanese subsidiaries.

Operations of this second type are found most extensively in two
industries, pharmaceuticals and electronics, where it might have been
expected to encounter some constraints. In the case of pharmaceuticals
the frequently observed importance of host-country regulations, and also
distinctive elements of consumer taste, might have been expected to
fragment the market in such a manner that the need to adapt products to
meet particular national requirements would severely compromise the
ability of one supply location to meet the wider European demand for a
product. In fact the U.K. subsidiaries of European pharmaceutical MNEs
(an AR of 2.80) and also those from the U.S. (AR of 2.40) defy this
proposition. A key clement in this may be that the reasons for product
adaptation may be easy to both discern and communicate in the
pharmaceutical industry. Thus the specific requirements of government
regulations should he set out in a clearly documented form which can be
easily communicated, as perhaps can the relevant aspects of consumer
tastes (e.g. for drugs in tablet, capsule or liquid form). In this way a
subsidiary producing a particular product can differentiate it for a
range of separate national markets without needing the close association
with consumers in each of them that is often considered necessary in
other industries.

In electronics it might have been anticipated that unique European
standards (e.g. TV transmission systems and electricity supply
characteristics) might have meant that U.S. and Japanese companies would
need to develop unique new versions of their products for the European
market, with these taking on distinctive characteristics that go beyond
the mere adaptation of those that originated in the home country. In
fact the Japanese subsidiaries to a very notable degree (AR of 2.77 for
this rote), and also the U.S. to a quite significant extent (AR of
2.33), were able to use their U.K. operations to supply an established
part of the MNEs' product range to the wider European market. By
contrast European electronics MNEs' subsidiaries in the U.K., were
very strongly oriented to the first, local-market, role (AR of 2.71),
with little commitment to the second (AR of 1.86). This may mean that
European electronics companies are mainly interested in niche markets of
limited concern to U.S. and Japanese enterprises, and their U.K.
subsidiaries seek to adapt such products to particular local
requirements.

As a complement to the second role the next was `to play a role in
the MNE group's European supply network by producing and exporting
component parts for assembly elsewhere'. Once again the assumption
is that the emergence of such roles in a European network of MNE
subsidiaries would seek to optimise the more static dimensions of
efficiency by achieving economies of scale or by producing particular
components in locations that are especially favourable in terms of input
availabilities or costs. This role turned out to be by far the least
prevalent of the four, with 127 (70.2%) of the 181 subsidiaries who
evaluated it considering it was not a part of their operations, only 11
(6.1%) rating it a predominant role and 2 (1.1%) focusing on it
entirely. This may mean either that MNEs generally do not make extensive
use of such decentralised component-supply networks in their European
operations, or that the U.K. is not often considered a particularly
relevant site for that type of activity. The role does seem to be rather
more developed in U.S. subsidiaries in the U.K. than in those of
Japanese or European MNEs. It is thus U.S. subsidiaries that contribute
particularly strongly to those industries that have a relatively strong
orientation to this role, with ARs of 1.88 in automobiles, 1.75 in
chemicals and 1.60 in pharmaceuticals.

The final role analysed was defined as being `to develop, produce
and market for the U.K. and/or European (or wider) markets, new products
additional to the MNE group's existing range'. The key
evolutionary aspect of this role is therefore the widening of the
creative scope of the subsidiary by allowing it to move beyond the range
of established products and derive its own distinctive contribution to
the group's capabilities. As in the second and third roles the
subsidiary's position is again predicated on specialization, but
here this is secured not so much from a static advantage in the use of
an existing technology (embodied in the established goods produced) but
more from a dynamic ability to move the group's technology itself
forward in the direction of new applications in distinctive additional
products. When they escape from situations which mainly involve the
effective implementation of allocated roles in existing supply networks
and instead are allowed to win higher-value-added positions based around
their own capabilities, subsidiaries immediately enhance the value of
their own human capital by enabling management, engineering, scientific
and other personnel to more fully realise their potential. The
alleviation of the sense of frustration that is likely to beset such
personnel when their scope is limited to the dependent implementation of
externally-determined group-level production programmes is another
likely benefit of their accession to a more autonomous and creative
situation. The possibility of a country being host to subsidiaries
playing this role is then less likely to be decisively influenced by the
availability and cost of production inputs, with the scope and quality
of creative assets (e.g. managerial and marketing personnel, the wider
scientific community) emerging as more relevant determinants. With its
emphasis on product development the definition of this fourth role is
agnostic as to the market focus of the operations. However, it is very
likely that a subsidiary that played the role successfully would be
expected to create products that could secure a share of wider markets
(here at least the European) than that of their host country.

Of the 184 responding subsidiaries that evaluated the relevance of
this role in their operations 16 (8.7%) said it was their only one, 50
(27.2%) their predominant role, 63 (34.2%) that it took a secondary
position and 55 (29.9%) that it was absent. When these figures ate
converted into an average response (Table 1) it is clear that these more
contemporary creative type of operations have now taken their place
among the key roles played by MNE subsidiaries in the U.K. Indeed only
for Japanese subsidiaries does the presence of this role not yet match
that of the first two. Thus the Japanese MNEs' U.K. operations
encompass very strongly one evolutionary development, a notable
orientation to supply the wider European market (role two), but allocate
much less prominance to the other in the form of creative responsibility
at the subsidiary level (role four). Both of these differences may
reflect the relative newness of the Japanese facilities. 7 Thus the
majority of these subsidiaries have been set up at a time when the need
for a European perspective on supply programmes is fully understood in
many industries. On the other hand the viability and benefits of the
incorporation of creative scope within subsidiaries may only be
understood after the success of the more routine roles has been secured.
The extension of operations to the fourth role may still be an
evolutionary one, only perceived as viable when the less ambitious roles
have allowed subsidiaries to fully settle in an environment and
comprehend its needs and potentials, On this basis it may well be the
case that this role may soon match the others in Japanese subsidiaries,
as indeed it may move into clearer predominance in U.S. or European
operations.

Food industry subsidiaries are the most strongly committed to this
fourth role, with an especially extensive involvement of U.S.
subsidiaries (an AR of 2.80). This parallels their strong evolution of
the first, U.K.-market focused, role (AR of 2.80) so it may be that U.S.
subsidiaries initially needed to adapt their established food products
quite extensively to meet U.K. tastes and conditions and in doing so
created types of expertise within the subsidiaries that encouraged the
complementary implementation of more extensive product development. The
strong product development role in mechanical engineering, which
reflects the pervasive need to supply customised capital goods to meet
individual firms' specifications, is most notable in U.S.
subsidiaries (AR of 2.71) but also quite prevalent in Japanese and
European (AR of 2.22 in both cases). The result for instruments mainly
represents the behaviour of U.S. subsidiaries (AR of 2.43) and probably
reflects the need of these firms to apply their existing technology to
European conditions more competitively by developing products that
embody it in ways that meet distinctive requirements of particular
scientists, health services, firms, etc. The strength of the product
development role in automobiles reflects the behaviour of U.S. (AR of
2.50) and Japanese (AR of 2.43) subsidiaries in the U.K., rather than
those from European MNEs (AR of 1.50). Thus in the latter case the U.K.
mainly provides a supply base for cars and components that have already
been designed to fully incorporate European needs, but the U.S. and
Japanese subsidiaries in the U.K. have a much more extensive
responsibility to contribute to the derivation of specifically European
parts of their MNE's product range.

Pharmaceuticals and electronics are the two industries in which
the product development role is least extensive in subsidiaries in the
U.K. Taken alongside its prevalence in food and mechanical engineering
it is clear that participation in a technologically-dynamic industry is
neither necessary nor sufficient to generate product development
activity in subsidiaries. Implementation of such operations is clearly
more likely to reflect a wide range of subsidiary and host-country
endowments and motivations, rather than predominantly respond to the
degree of technological opportunity endemic in the industry. Indeed in
industries such as pharmaceuticals and electronics, where leading
contemporary technological paradigms (biotechnology; micro-electronics
and information technology) are very influential, the desire of leading
MNEs to maximise the benefits from participation in such scientific
areas may lead to greater centralised control over the firm's own
technological trajectory with less room for relatively autonomous
dispersed creative initiatives, in pharmaceuticals it therefore seems
likely that most product development is centralised (or at least carried
out in labs with no direct association with a particular production
unit) and can be relatively easily and effectively communicated to
specialised production subsidiaries. These in turn can, as noted
earlier, supply the product to a range of markets using their own
adaptation capabilities of differentiate it in ways needed to respond to
any specific requirements of individual national markets in their target
region. In electronics too it may be that the factors that might provoke
the need for U.S. or Japanese companies to develop specific European
product variants can also take a clearly documented or codified form
(regulations or technical specifications), rather than being the type of
diffused and evolving taste-related characteristics that need
subsidiary-level marketing expertise to detect, and in-house
technological capacity to respond to adequately and sensitively. If the
relevant specifications or characteristics are defined relatively
precisely then development of a European product can again be carried
out away from the specialised production facility, either in the home
country or in a dedicated R & D unit serving all European
operations.

Sources of Technology In the Subsidiaries

Traditionally it has been accepted that the role played by overseas
subsidiaries in MNEs has been determined by factors that are
predominantly related to market orientation and the availability and
cost of physical inputs into the production process. Once such
influences have determined the role that is to be allocated to a
subsidiary within the MNE's overall operations, its basic
technological needs will follow and can then be supplied from within the
group's established knowledge capacity, In these circumstances the
upper limit to the individual technological capacities required within a
subsidiary would be the ability to assimilate the relevant knowledge
effectively, and to discern the need for, and to secure the effective
implementation of any product or process adaptation necessary to
optimise the standard technology's applicability to its particular
market and operating conditions. Now the ability of individual
subsidiaries to develop their own creative competences, often reflecting
the wider scientific and knowledge (educational) background of their
host country, may to some extent be reversing the direction of
causation.

The emergence in subsidiaries of creative competences (managerial,
technological, marketing) that provide a scope that extends beyond that
needed in the more traditional roles underwrites their pursuit of and
accession to, the higher-value-added product development activities that
increase both their own autonomy and the wider competitiveness of their
group. Ultimately the skills and technology available to the subsidiary
will determine its role, rather than an externally allocated role
determining its needs with regards to such assets. Thus subsidiaries go
through a creative transition s in which distinctive attributes
increasingly differentiate their position in the group, whose overall
competitive scope is thereby extended. The ability of a subsidiary to
achieve an effective creative transition both depends upon, and enhances
the return to, a host country's knowledge (scientific and
educational) background.

Against this background we proceed by analysing the relative
importance of seven possible sources of technology that could be used in
MNEs' overseas subsidiaries, using information derived from the
survey of such operations in the U.K. In Table 2 the replies are
summarised with average responses in order to show the variation in the
use of the sources according to industry and the home country of the
MNE. Table 3 extends the analysis by looking at the manner in which use
of particular technology sources varies according to the role of the
subsidiary. Thus for each source of technology an AR is calculated for
subsidiaries that reported a particular role as either their only one or
their predominant one.

Table 2. Relative Importance of Sources of Technology in MNE
Subsidiaries in the U.K., by Industry and Home Country,

Sources of technology:

A -- existing technology embodied in established products we produce.

B -- technology of our MNE group from which we introduce new products
for the U.K./European market, that differ from other variants introduced
in other markets.

C -- R & D carried out by our own laboratory.

D -- R & D carried out for us by another R & D laboratory of
our MNE group.

G -- development and adaptation carried out less formally by members
of our engineering unit and production personnel.

(*) Respondents were asked to grade each source of technology for
their operation as (i) our only source, (ii) a major source, (iii) a
secondary source, (iv) not a source.

(**) The average response is calculated, for respondents that said
that a particular role was either their only one or their predominant
one, by allocating a value of 4 to `our only source', 3 to `a major
source', 2 to `a secondary source', 1 to `not a source'.

The list of potential technology sources begins with two that
reflect the fact that, even when they are able to create strong elements
of unique creative competence within their own operations, subsidiaries
are likely to remain to a substantial degree within a pervasive
technological scope that defines the MNE group of which they are a part.
Thus respondents were firstly asked to grade as either `our only source
of technology', or `a major source', `a secondary
source', `not a source', `existing technology embodied in
established products we produce'. This then relates to the mature
mainstream technology of the group, as already successful embodied in
the products whose market success has achieved levels that involve
decentralised production in overseas subsidiaries. This emerges as being
clearly perceived as the most significant operative source of their
technology by the responding subsidiaries. Indeed its pervasiveness is
such that Table 2 shows it to be the leading source in subsidiaries in
every industry covered and from each of the home countries.

Such established embodied technology is shown in Table 3 to be the
major source used in the three subsidiary roles that are either defined
around existing products (the first two discussed in the previous
section)or are likely to be locked into current supply networks (the
third). Though this would have been a clearly predicted outcome, the
equally strong prevalence of this source of technology in the operations
of the fourth (product development) type of subsidiary is much more
surprising. Of some influence on this result is the fact that a number
of subsidiaries that rated the fourth role as a predominant one also
provided the same rating to one of the others, and included such
embodied technology as a major source because of this. This factor,
however, is very unlikely to explain more than a small part of the
position of this technology in the product development subsidiaries. An
explanation that is inherent to the mode of operation of these
subsidiaries can be derived from the perception of the evolutionary
theory of technological change and the importance of a tacit element of
knowledge.(9) Thus the skills and the technological knowledge that
underpin the distinctive competences that earn product development
subsidiaries their new position are likely to have emerged from, and
will therefore have been conditioned by, what they have been doing in
their previous dominant role. Though the broad motivation and capability
of key personnel in subsidiaries that seek to transcend previous
dependent roles clearly reflect their own talent and education, its
detailed applicability to the nature of evolving operations will still
encompass a strong element that derives from training in the MNE and
from the subsidiaries earlier background. Similarly the degree of
technological autonomy achieved in such product development activity is
likely to reflect a strong evolutionary addition of local knowledge and
expertise to the group's mainstream technology, rather than a
revolutionary break from it. Established products previously (and
perhaps still) produced by the subsidiaries are likely to be a crucial
element through which they perceive the group technology which will
remain a component in their more idiosyncratic evolution.

The second source of technology available to subsidiaries that
reflects a MNE's current predominant technological trajectory was
defined as `technology of our MNE group from which we introduce new
products for the U.K./European market, that differ from other variants
introduced in other markets'. The key difference from the previous
type of technology is that this is accessed by the subsidiary in a
disembodied form, from which it can itself create the full detail of a
product competitive in its own markets. This mode of behaviour suggests
first that, at the group level, the technology underpinning a major new
innovation emerges. Then, however, rather allowing the innovation
process to be completed centrally, in the manner of the original
product-cycle model,(10) and subsequently gradually emerge into foreign
markets and overseas production, it is likely that the pressures of
contemporary competition would dictate that the new good be immediately
produced in major markets in forms that fully respond to local needs
there.(11) Subsidiaries in such markets therefore pick up the technology
that defines the outlines of the new product and use their own
distinctive local competences (marketing and technological, etc.) to
complete its competitive development. This type of scenario would
clearly locate the use of the decentralised creative and scientific
competences in the newer type of subsidiary within a technological
programme that remains under strong central influence and supervision.

Though of quite widespread relevance (only 23% of respondents felt
it played no role in their technology inputs) this source was clearly
less significant than the first, Table 3 shows that the expectation that
the emergent product development subsidiaries would be the most decisive
users of this type of technology is somewhat confounded. It seems that
tn their behaviour so far these types of subsidiaries tend to build
their distinctive competences as an evolution of their past activity
(based around established group technology, as just discussed), rather
more than as a systematic involvement with the development and
application of new group-level technology. In fact this type of
technology appears to be most applicable in the component supply
operations of the third type of subsidiary. This provides the first
indication from our results that this type of subsidiary may not be a
purely dependent operation supplying well-defined inputs (and therefore
almost exclusively using established embodied technology) to
cost-effective supply networks for a MNE's mature generations of
products, Instead at least part of their motivation does seem to involve
direct access to group-level technology and through this the creation of
new input goods, either to help upgrade existing products in which they
are incorporated or as a collaboration with those product development
subsidiaries which themselves are working with new group technology in
the manner hypothesis.

The reporting of this source of technology by subsidiaries of the
first two types, which are mandated to manufacture products for already
strongly established markets, may occur when they do sufficient adaptive
work on the existing product to feel an involvement in the creative
process. This perception of their position with regard to the technology
of the products they supply may reflect a frustration in such
subsidiaries at their dependent position, and indicate an incipient
attempt to move towards the more fully-fledged product-development role.
Also, in some industries, there may exist a phase in the application of
a particular piece of knowledge where it is not easy to distinguish
between the adaptive evolution of existing products and the creation of
distinctly new ones.

The evidence so far, therefore, clearly indicates that overseas
subsidiaries in MNEs still operate within the confines of well-defined
group-level technology. However, it is a strong thesis of this paper
that to sustain true global competitiveness it is desirable for MNEs to
allow their overseas subsidiaries to mediate in the effective
application of this group technology in their various market and
production environments, either by adapting products which already
embody established group knowledge or by developing additional products
from its more recently created technology. The remaining five sources of
technology covered in the survey therefore relate predominantly to ways
in which subsidiaries can obtain the ability to add their own creative
efforts to the core technology secured from within their group.

The first of this second group of sources was `R & D carried
out by our own laboratory'. One of the most visible manifestations
of the widening of the geographical dimensions of technological activity
in MNEs in recent years has been the growth in the number of their
overseas R & D units, whilst the range of roles played by such
facilities endorses the newer perspectives on global competitiveness
pursued through subsidiaries.(12) Of the 179 respondents which evaluated
this source 73 (40.8%) said it did not play any role in their
technology, 36 (20.1%) rated it a secondary source, 64 (35.8%) believed
it to be a major source of their technology and 6 (3.4%) the only one.
This suggests that over half of the subsidiaries in the survey possessed
their own R & D operation as a means of implementing group
technology, and of extending their distinctive capabilities and
capacities.

As would have been expected it is the product development type of
subsidiaries that find the strongest position for a R & D laboratory
within their operations (Table 3). The second place taken by the
specialist component supply subsidiaries in terms of finding a need for
their own R & D units reinforces the emerging perception that
performance of this role is somewhat less technologically dependent than
might have been expected, and takes on its own distinct element of
creativity. The less strong position for their own R & D in the two
types of subsidiaries that supply established products reflects the fact
that their needs should be limited to product adaptation and assistance
in implementing an existing production process, so that where they have
a lab its contribution is likely to be quite constrained.(13)

The use of their own R & D is much less well developed in the
Japanese subsidiaries in the U.K. than in those with U.S. or European
parents (Table 2). This parallels the relatively limited emergence of
the product development role in these usually recently established
operations, and, as already speculated, greater familiarity with the
local environment may enable them to move towards the incorporation of
more technological scope and complementary increase in subsidiary
creativity and autonomy.(14) The industry in which respondents reported
the strongest use of their own R & D was food. In line with earlier
observations it may be that the U.S. subsidiaries that are prevalent in
the sector set up labs early to assist in the adaptation of established
products for the U.K. market, and the dynamic generated by their success
then underpined a move towards the complementary incorporation of the
product development role, which in turn increased the importance of the
labs within their overall operations. The importance of such in-house R
& D in instruments and industrial and agricultural chemicals again
parallels the relatively strong presence of the product development role
in the subsidiaries. Use of their own R & D is also very important
in pharmaceutical subsidiaries despite the relative weakness of the
product development role. We peculated earlier, however, that the strong
export role in this industry might involve the supply of adapted
variants of a centrally-created product to meet particular government
regulations and health service requirements in several different market
Implementing these adaptations in such a technologically sophisticated
industry may then need the commitment of a dedicated R & D unit to
support the production facility.

The survey also investigated the relevance a a source of
subsidiary technology of `R & D carried out for us by another R
& D laboratory of our MNE group'. Of 181 respondents that
evaluated this 48 (26.5%) did not use it, for 5.4 (30.4%) it served as a
secondary source of technology, 69 (38.1%) considered it a major source
and 9 (5.0%) said it was their only one, The derived AR of 2.22 thus
places this source somewhat ahead of subsidiaries' own R & D
(2.02). R & D from other labs may have secured this position either
by substituting for in-house R & D, by enabling a subsidiary to
secure certain knowledge inputs for which it would otherwise have needed
to create its own facility, or by complementing it by providing extra
specialized expertise that can fill out a research programme. We have
already noted that only 26,5% of respondents did not make any use of R
& D supplied by another group lab, whilst 40.8%, did not use R &
D from a lab of their own, This would suggest that until the need for R
& D support becomes extensive or persistent subsidiaries seek to
secure it elsewhere and avoid the expense of an in-house unit. It can
also be observed that amongst respondents that did use their own R &
D results, only 34.0% considered this only a secondary source of
technology, whilst 41.4% of those that received R & D from another
lab felt its use was limited to the secondary level. This would provide
modest backing for the view that once a subsidiary has its own lab this
is then more likely to supply key technological inputs, with externally
acquired R & D becoming more of a supplementary source.

A logical extension of this view is that a subsidiary's own
laboratory is likely to develop R & D programmes that support its
wider objectives, and may complement this by commissioning specialised
support from other group facilities when relevant, Thus the R & D
from other labs may substitute for a subsidiary's own in-house
operations up to a certain level of technological need or ambition,
after which a lab of its own may move towards the core of the
subsidiary's technical activity, with the acquisition of R & D
from elsewhere now serving as a complementary source. Overall these
perspectives suggest that even as subsidiaries increasingly pursue
certain degrees of creative autonomy, the scope for technological
interdependence throughout a MNE group remains an important asset.
Creative autonomy should not mean technological autarchy.

It emerges in Table 3 that R & D carried out in another
laboratory of the MNE group takes an important position, and clear
precedence over a subsidiary's own R & D, where the main roles
are the two involving supply of established products. This is likely to
be a case where subsidiaries may need assistance in assimilating and/or
adapting existing technology, but often do not feel that the problems
are sufficiently deep or extensive to merit the creation of their own
lab. In addition they may be able to secure this support from another
group lab which already has experience of the technology at issue,
either having been involved in its creation or having assisted in its
implementation in another context. In product development subsidiaries,
and to a lesser extent in those producing components, the use of R &
D from other labs takes second place to in-house work. Thus once a
subsidiary's level of ambition moves from supply of a standardised
good to product creation its own R & D laboratory takes a position
at the centre of its technology, with continued access to inputs from
elsewhere in the MNE group's R & D network now serving as a
useful auxilliary source.

Use of R & D inputs from another group lab is of notable
importance in automobiles, an industry where the substantial presence of
product development subsidiaries does not result in a strong commitment
to in-house R & D. It seems likely that in this case the product
development responsibility in U.K. subsidiaries (which also complements
a strong position for the export of established products) is often
allocated by Europe-level planning in MNEs (rather than resulting from
the creative initiative of the subsidiaries), and is implemented through
close and systematic collaboration with key centralised labs which play
leading roles in supporting their groups' Europe-wide operations. A
preference for strong centralised labs supporting a Europe-wide network
of supply facilities is also likely to explain the more extensive use of
R & D inputs from elsewhere in their MNE group by electronics
subsidiaries in the U.K. The significant position of this source both in
industrial and agricultural chemicals and in pharmaceuticals suggests
that a relative ease of knowledge communication in these industries
enables in-house facilities to collaborate with other group labs to
ensure the most effective assimilation and adaptation of their
MNE's staple technologies by U.K. subsidiaries.

As a source of technology for MNE subsidiaries in the U.K. `R
& D carried out in collaboration with another firm' emerged in
a very minor position. Thus 106 (58.9%) of 180 respondents said it
played no role, and 63 (85.1%) of those that did allocate it some
position in their technology supply considered it to be only a secondary
one. Though inter-firm technology collaboration has grown in importance
in recent years(15) it is likely that when such alliances involve joint
R & D work this serves a predominantly strategic function,(16)
mainly focusing on basic and precompetitive research, with the
programmes articulated through central-laboratory planners and not
involving labs in subsidiaries (or directly supporting their production
operations).

The use of local scientific institutions (e. g. universities;
independent or industry-funded labs) to carry out R & D for the
subsidiary also takes a relatively limited position in their technology
supply. Of 181 respondents that evaluated this source of technology 102
(56.4%) considered that it had no role, and a further 73 (40.3%) that it
was restricted to a secondary position. Use of this source of R & D
does appear in Table 3 to be somewhat more prevalent in the product
development and component supply subsidiaries than in those that are
more oriented to the manufacture of established products. Thus, as would
be anticipated, R & D of local universities etc. seems more likely
to be called into play to supplement efforts that are already
established within subsidiaries, than as a source of direct solutions to
their technology problems. This tends to be confirmed by the fact that 4
of the 5 industries that have an above average use of this source of R
& D are the 4 that provide distinctively the strongest role for R
& D carried out by their own labs (Table 2). In fact earlier
analysis has shown(17) that the MNE labs that are most likely to
establish links with local scientific institutions tend to be standalone
facilities (not committed to support an associated production unit),
carrying out basic/precompetitive research as part of group-supported
programmes.

The final source of technology that the subsidiaries were asked to
evaluate was `development and adaptation carried out less formally by
members of our engineering unit and production personnel.' With 1
(0.6%) of 178 respondents considering this its only source, 41 (23.0%)
rating it a major source, 97 (54.5%) a secondary source and only 39
(21.9%) believing it played no role, it emerges in Table 2 with an
identical AR to the other in-house source of technology, i.e. `R & D
carried out by our own laboratory'. Table 3 shows that, compared
with the more formal in-house R & D, the creative use of engineering
and production personnel was somewhat more prevalent in the subsidiaries
supplying established goods to U.K. markets, of equal relevance in those
exporting established goods or components, and relatively of less
importance in those doing product development. Talented engineers and
production personnel are likely to embody tacit knowledge derived
predominantly from their training and day-to-day experience within the
MNE group. This type of knowledge is therefore strongly firm specific,
and of considerable value when the subsidiary is applying established
group technology. Even when the technology to be used is new to the
subsidiary it will be within a tradition such personnel understand, so
they can therefore usually make a significant contribution (sometimes in
association with a laboratory) to its effective assimilation. When a
subsidiary's motivation is more decisively oriented to product
development and the desire to make a distinctive technological
contribution that extends the scope of the group, these extra dimensions
(because they to some degree transcend the tradition that the engineers
and production personnel are familiar with) often need to be pursued
through a more extensive formalised R & D effort. Thus, whereas this
role of engineers adds to group technological cohesion and coherence, it
may also be the first step towards the emergence of new subsidiary-level
knowledge scope.

Two industries in which this source of technology input is of
above average importance, and which also report an above average
orientation to product development work but a relatively limited use of
in-house R & D, are mechanical engineering and metal manufacture and
products. In both these cases it seems likely that the predominant form
of product development will be the derivation of customised goods for
individual clients. Where this occurs the goods will usually be created
from a staple established technology, rather than needing a
research-based extension of the industry's scope, so that it can be
implemented through engineering, production, design or other shop-floor
personnel who have a sustained involvement with the company's
knowledge background. With the exception of instruments, the industries
that have extensive in-house R & D (food, chemicals,
pharmaceuticals) find relatively limited need to depend on creative
inputs from engineering and production personnel.

Conclusion

An important recent development in the literature of the MNE has been
an understanding of the range of roles that can be played by
subsidiaries in the context of their group's wider strategies.(18)
Within this strand of the literature a very relevant emphasis is now
often placed on the ability of subsidiaries to differentiate their
technological scope and competences in ways that earn them distinctive
positions within their MNE group.(19) This type of subsidiary
positioning both augments the range of knowledge sources available to
the group and also facilitates an increasingly effective application of
this technological scope to the needs of global competitiveness. It is
therefore perceived that the level of response to the needs of the more
dynamic global competitive environment can valuably be increasingly
decentralised, with creative subsidiaries extending the range of
response to market signals and enhancing the scope of new technological
inputs in the group. The survey evidence discussed in this paper
indicates that product development is now a clearly established role in
MNE subsidiaries in the U.K.

It is also suggested by the survey results that the distinctive
competences which provide creative product development subsidiaries with
their enhanced positions emerge from their background and experience
within the group, rather than constituting more radical perspectives.
These subsidiaries add an increased range to decentralised competences
which build on, and increase the effective implementation of, the
MNE's established technological trajectory rather than comprising a
significant challenge to it. Nevertheless the acquisition of an in-house
R & D unit does seem to be a characteristic of many such product
development subsidiaries, so that their emergency in MNEs should widen
the range and scope of the science available to them worldwide and
thereby perhaps affect the longer-term evolution of the group's
technology. As the experience and aims of the in-house subsidiary R
& D labs deepen it may be that they will mediate more in a closer
collaboration with other elements in the local scientific community (e.
g. universities, other firms' labs), but to date this seems quite
limited, Rather more developed so far seems to be the practice of
securing R & D support from elsewhere in the MNE group, either to
supplement their own lab's work in product development
subsidiaries, or to help with the implementation of established products
in less technologically ambitious subsidiaries. Overall then the picture
is one of substantial evolution in the technological behaviour of MNEs,
with new global challenges bringing forth more globalised perspectives
on the creation and use of their knowledge base.

Endnotes

(1) See also Bartlett (1986), Bartlett and Ghoshal (1986), Ghoshal
and Nohria (1989), Hedlund (1986), for discussion of the emergence of
heterogeneous subsidiary competences in the contemporary MNEs'
strategic evolution,

(2) The questionnaire was sent, in late 1993/early 1994, to all the
relevant subsidiaries that could be identified from the National
Register Publishing Company's International Directory of Corporate
Affiliations. It was addressed, in the first instance, to the Managing
Director, though there is evidence that in some cases the responsibility
for reply was delegated to senior subordinates.

(3) By industry the highest response rates were achieved in
electronics and electrical appliances (30.5%), pharmaceuticals (27.9%)
and instruments (25.5%) and the lowest in food (19.1%) and mechanical
engineering (19.4%). By home country of subsidiary Japanese respondents
provided clearly the best response rate (33,7%) with the U.S. (21.0%)
and Europe (19.5%) both slightly below average, Since it also appears
that the response rate was generally rather higher amongst larger and
longer established subsidiaries the higher response rate in Japanese
subsidiaries may suggest a proportionately greater extension into
relatively smaller and newer subsidiaries, if this is so it may
reinforce the view in the paper that Japanese subsidiaries are less far
(compared to U.S. and European) down the path of implementation of
in-house technology and adoption of product development roles.

(4) Overall 5.8% of European subsidiaries' replies evaluating
particular roles said they were the only one, compared with 5,3% of all
replies, However only 23.7% of European subsidiaries' replies
related to predominant roles compared with 29.4% of all replies. By
contrast 45. 1% of European replies were `not a part of our role'
compared with 34,0% of U.S. subsidiaries replies and 40.4% of Japanese,

(5) See Pearce (1992) and Eden (1991) for discussion of the changes
in the competitive environment that underwrite this role for
subsidiaries,

(6) This is compatible with other evidence from the survey which
shows that the subsidiaries of European MNEs were more likely than U.S.
or Japanese to see the U.K. market as their only one, and were also
clearly the least export oriented overall.

(7) Only 17.6% of Japanese subsidiaries had been set up before 1980.
This compares with 76.5% of U.S. and 71.1% of European.

(8) See Papanastassiou and Pearce (1994a).

(9) See Nelson and Winter (1982), Cantwell (1991), Dosi (1988).

(10) See Vernon (1966),

(11) See Papanastassiou and Pearce (199,4b) for discussion of
globalised approach to innovation in MNEs.

(12) See Pearce (1989), Pearce and Singh (1992)

(13) Of the subsidiaries playing (either exclusively or
predominantly) the role of supplying established products to the U.K.
market 48.1% did not consider their own R & D to be a source of
technology, and 19.0% only rated it a secondary source. For those
exporting established goods to European and other markets the comparable
figures were 35.6% and 24.1%, and for the component supplying
subsidiaries 33.3% and 16.7%. Only 22.2 of the product development
subsidiaries did not use their own R & D as a Source of technology
and only 11.1% fell it was limited to a secondary source.

(14) In fact JETRO data (see Papanastassiou and Pearce 1994c)
indicates a notable increase in Japanese MNE's R & D units in
the U.K. in the last few years.

(15) See Dunning (1993), Chesnais (1988) and Hagedoorn (1993) for
discussion of the emergence of strategic technology alliances.

(16) See Hagedoorn and Schakenraad (1991) for evidence on the
position of R & D-driven alliances amongst all `strategic technology
alliances.

(17) Pearce and Singh (1992).

(18) For a valuable delineation of the position of analysis of
subsidiary roles in the wider evolution of MNE literature see Birkinshaw
(1994).

(19) Such creative (product mandated) subsidiaries are discussed in
Etemad and Seguin Dulude (1946), and are al,so covered in the work of
White and Poynter (1984), Roth and Morrison (1992) and Pearce (1989,
1992).

References

Bartlett, C.A., Building and Managing the Transnational: The New
Organisational Challenge, in Porter, M.E. (Ed), Competition in Global
Industries. Harvard: Harvard Business School Press 1986, pp. 367-401.

Cantwell, J.A., The Theory of Technological Competence and its
Application to International Production, in McFetridge, D. (ed.),
Foreign Investment, Technology and Economic Growth, Calgary: The
University of Calgary Press 1991, pp. 33-70.

Hagedoorn, J./Schakenraad, J., The Role of Interfirm Cooperation
Agreements in the Globalisation of Economy and Technology. The
MONITOR-FAST Programme Prospective Dossier No. 2. Globalisation of
Economy and Technology, 8, Commission of the European Communities 1991.

Papanastassiou, M./Pearce, R.D., The Creation and Application of
Technology by MNEs' Subsidiaries in Europe, and Their Role in a
Global-innovation Strategy, University of Reading, Department of
Economics, Discussion Papers in International Investment and Business
Studies. No. 189, 1994 b.

Papanastassiou, M./Pearce, R.D., The Internationalisation of Research
and Development by Japanese Enterprises. R & D Management, 24, 2,
1994c. pp. 155-165. Pearce, R.D., The Internationalisation of Research
and Development by Multinational Enterprises, London: Macmillan 1989.

Importance of sources of technology* (average respond**)
A B C D
Roles of subsidiaries
To produce for the U.K. market 2.88 2.27 1.85 2.29
products that are already
established in our MNE group's
product range.
To play a role in the MNE group's 2.92 2.36 2.08 2.27
European supply network by
specialising in the production and
export of part of the established
product range.
To play a role in the MNE group's 2.83 2.62 2.17 2.08
European supply network by
producing and exporting component
parts for assembly elsewhere.
To develop, produce and market 2.86 2.33 2.52 2.05
for the U.K. and/or European
(or wider) markets, new products
additional to the MNE group's
existing range.
E F G
Roles of subsidiaries
To produce for the U.K. market 1.41 1.39 2.01
products that are already
established in our MNE group's
product range.
To play a role in the MNE group's 1.52 1.41 2.11
European supply network by
specialising in the production and
export of part of the established
product range.
To play a role in the MNE group's 1.67 1.58 2.17
European supply network by
producing and exporting component
parts for assembly elsewhere.
To develop, produce and market 1.55 1.62 2.13
for the U.K. and/or European
(or wider) markets, new products
additional to the MNE group's
existing range.